6 Q3 Small-Cap Gold Mining Fund Manager Picks

The small-cap gold mining companies as represented by the Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ), which also includes mid-cap gold miners, is down over 40% from the peak in December, while the price of gold itself is up over ten percent during the same period. However, long-term, the price of gold mining stocks should move in tandem with the price of gold that is used to value their assets and is an input to the revenue from their sales.

We believe this creates an opportunity to invest in the gold mining stocks, especially since many of the stocks are trading at very low valuations based on analyst forward earnings projections for FY 2012. While it is difficult to be precise about the future direction of the price of gold, and hence the absolute valuation of gold mining companies, due to the uncertainty in the future price of gold, it is perhaps easier to pick companies within the industry that would be relative out-performers and under-performers.

In this article, we identify small-cap gold mining stocks that are being accumulated and those being distributed by the world’s largest fund managers, managing between $100 billion and over a trillion dollars. Mid-cap and large-cap gold miners will be covered separately since the gold mining group itself is very large, and the small-cap gold mining companies typically attract a more speculative investor whereas the large-cap gold miners due to their stable revenue and earnings attract more risk-averse or conservative investors. Taken together, these mega managers are bullish on the small-cap gold mining group, adding $19 million to their prior $1.07 billion holdings in the group, and they are also severely under-weight the group by a factor of 0.2, which is understandable given that many of these companies are trading below $5 (for more general information on these mega funds, please look at the end of the article).

Lake Shore Gold Corp. (NYSEMKT:LSG): LSG is a Canadian company engaged in the exploration and mining of gold in northern Ontario and Quebec. Mega funds together added a new $39 million position in Q3, their largest addition in the small-cap gold mining group. The top buyers in Q3 were Royal Bank of Canada ($26 million), Fidelity Investments ($4 million) and JP Morgan Chase & Co. ($4 million). LSG currently generates losses every quarter as revenues are ramping up, and its shares are currently at their lows since trading began on the NYSE AMEX on August 1st.

Endeavour Silver Corp. (NYSE:EXK): EXK is a Canadian company engaged in the acquisition, exploration and development of silver and gold properties in Mexico. Mega funds together added a net $16 million in Q3 to their $20 million prior quarter position. The top mega fund buyer in Q3 was Deutsche Bank AG ($11 million), and top holders were Deutsche Bank AG ($14 million) and Fidelity Investments ($12 million). EXK trades at a discount current 20 P/E on a TTM basis, and at 4.7 P/B, compared to averages of 24.9 and 2.2 respectively for its peers among small-cap gold miners, while earnings are projected to rise strongly from 63c in 2011 to $1.01 in 2012.

Jaguar Mining Inc. (NYSE:JAG): JAG is a Canadian company engaged in the exploration, development and extraction of gold in Minas Gerais, Brazil. This is the largest position by far of mega funds in the small-cap gold mining group, both in absolute and relative terms, as they added a net $8 million in Q3 to their $128 million prior quarter position, and together they control an outsized 27.6% of the outstanding shares of the company versus their 7.5% weighting in the group. The top mega fund buyer in Q3 was Wells Fargo & Co. ($6 million), and the top holders were Capital Research Global Investors ($49 million) and Well Fargo & Co. ($36 million). JAG trades at current 27 P/E and 1.8 P/B compared to averages of 24.9 and 2.2 respectively for small-cap gold miners, while earnings are projected to double from 26c in 2011 to 54c in 2012.

The following are select small-cap gold miners that these mega fund managers are most bearish about (see Table):

US Gold Corp. (NYSE:UXG): UXG is engaged in the exploration and development of gold, silver and other precious metals in NV and in Mexico. Mega funds cut a net $13 million in Q3 from its $98 million prior quarter position; however, they hold an outsized 20.0% of the outstanding shares versus the 7.5% weighting of mega funds in the group. The largest mega fund sellers in Q3 were Fidelity Investments ($9 million) and State Street Corp. ($4 million). UXG shares currently trade at their lows in concert with the weakness in the gold sector. It does not currently generate any revenue, and is scheduled to begin production in 2014.

Brigus Gold Corp. (BRD): BRD is engaged in the exploration, development and production of gold and other metals in the U.S., Canada and Mexico. Mega funds unloaded half their prior quarter $14 million position in Q3, and they hold only 3.5% of the outstanding shares versus their 7.5% weighting in the group. The top mega fund seller in Q3 was Wellington Capital Management ($7 million). BRD shares currently are at their lows, and it trades at a cheap 5-6 forward P/E, and at 1.2 P/B compared to the 1.8 average for the small-cap gold miners.

Great Basin Gold Ltd. (NYSEMKT:GBG): GBG is a Canadian company engaged in the exploration and development of gold properties in South Africa and the U.S. Mega funds cut a net $3 million in Q3 from their $55 million prior quarter position in the company. The top mega fund sellers were JP Morgan Chase & Co. ($3 million) and Royal Bank of Canada ($2 million). GBG shares are currently at their lows, and it trades at a cheap 3-4 forward P/E, and at 1.1 P/B compared to the 1.8 average for small-cap junior gold miners.

Golden Star Resources (NYSEMKT:GSS): GSS is a Canadian International gold mining and exploration company producing gold in Ghana, West Africa. Mega funds cut a net $3 million in Q3 from their $55 million prior quarter position in the company. The top mega fund seller was Deutsche Bank AG ($2 million). GSS shares are currently at their lows, and it trades at a cheap 5-6 forward P/E, and at 1.1 P/B compared to the 1.8 average for small-cap junior gold miners.

Table []

Note to Table: The companies selected to be included in both the Top Buys and Sells and Top Holdings categories in the Table were picked on both an absolute basis, i.e. the highest dollar amounts of buys and/or sells, as well as those amounts relative to their market-cap. That way, the list is not biased towards the largest companies in the group.

General Methodology and Background Information: The latest available institutional 13-F filings of over 30+ mega hedge fund and mutual fund managers were analyzed to determine their capital allocation among different industry groupings, and to determine their favorite picks and pans in each group. The list includes prominent managers such as Wellington Management ($1.6 trillion in total assets under management), Vanguard Group ($1.4 trillion), Fidelity Investments ($640 billion), T Rowe Price ($330 billion), and Goldman Sachs Asset Management ($580 billion), among others.

These mega fund managers number less than one percent of all funds and yet they control almost half of the U.S. equity discretionary fund assets. The argument is that mega institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When mega Institutional Investors invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his own due diligence.

This article is part of a series on institutional holdings in various industry groups and sectors, and other articles in the series for this and prior quarters can be accessed from our author page.

Credit: Fundamental data in this article were based on SEC filings, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our ‘opinions’ and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.